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Apple: Is it time to buy one of the world's largest companies?

Opdateret: 14. jun.

Large companies are generally safer investments than mid- and small-cap counterparts. Thus, many investors look to large corporations when investing. There is no larger company than Apple, and combined with being the largest position of Warren Buffett, it is natural that many look in the direction of Apple. Is now the time to invest?

This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.

For full disclosure, I should mention that at the time of writing this post, I do not own any shares in Apple directly. I do own shares in Berkshire Hathaway, though. I also hold a position in Varta, which supplies micro batteries for AirPods, and I have a position in Zepp, which competes with Apple in the smartwatch industry. If you would like to view or copy my portfolio, you can find instructions on how to do so here. I should also mention that I own Apple products and that I am a big fan of their products. Nonetheless, I will keep this analysis unbiased. If you want to purchase shares or fractional shares of Apple, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.

Apple is a multinational technology company headquartered in California. It was founded in 1976 and had its initial public offering (IPO) in 1980. It is now one of the largest holdings in the three major indices: the Dow Jones, S&P 500, and Nasdaq 100. I believe most people are familiar with Apple, so I won't go into the company's details. However, I think it is important to note that the company operates in two distinct business segments: Products and Services. Products consist of iPhone, Mac, iPad, Wearables, Home, and Accessories. Services consist of Advertising, AppleCare, Cloud Services, Digital Content, and Payment Services. In fiscal year 2023, products accounted for approximately 78% of the net sales, while services contributed 22%. Apple's reportable geographical segments are as follows: the Americas (North and South America), which contribute 42% of net sales; Europe (European countries, India, the Middle East, and Africa), contributing 25% of net sales; Greater China (mainland China, Hong Kong, and Taiwan), contributing 19% of net sales; Japan, contributing 6% of net sales; and Rest of Asia Pacific (Australia and other Asian countries not included in the Company's other reportable segments), contributing 8% of net sales. Apple has a very strong brand moat, as it is ranked as the most valuable brand in 2023 by several companies. I will also argue that Apple has a switching barrier. Once a consumer owns multiple Apple products, they become deeply integrated into the consumer's life, making it less appealing to switch to a competitor.

Their CEO is Tim Cook. Before joining Apple, Tim Cook worked at IBM and Compaq until 1998. Steve Jobs then invited him to join Apple, where he began as the Senior Vice President for worldwide operations. His educational background includes a Bachelor of Science in Industrial Engineering and a Master of Business Administration. Since becoming the CEO, he has done a great job. Apple has doubled its revenue and profit, and the company's market value has increased fivefold. When it comes to employee satisfaction, Apple consistently ranks highly on lists of "best tech companies to work for," and Tim Cook consistently scores over 91% on employee approval ratings. Tim Cook has also received praise from Warren Buffett, who called him a fantastic manager of Apple. I haven't been able to find much criticism of Tim Cook. However, I have read that some people are disappointed that he is not more like Steve Jobs and that he lacks enthusiasm and innovation. I don't think it is fair to compare Tim Cook with Steve Jobs, as very few people are like Steve Jobs. All in all, I feel very confident with Tim Cook leading Apple in the future.

I believe that Apple has a strong brand and switching moats. I really appreciate the management too. Now, let's analyze the numbers to determine if Apple meets our criteria for a strong competitive advantage. If you need an explanation of the numbers, you can refer to "MY STRATEGY" on the website.

The first metric we will examine is the return on invested capital, also known as ROIC. We require a 10-year history and all years should show numbers above 10%. Apple delivers one of the best returns on invested capital (ROIC) I have ever seen. The percentage has consistently exceeded the required 10% over the past 10 years. And the numbers since 2021 have been amazing. I am uncertain whether Apple can sustain growth rates above 50%, but they have achieved this for the past three years, suggesting that it may be a trend that persists. Especially because Apple managed to achieve their highest numbers in fiscal year 2022 and fiscal year 2023, which have been challenging years for most companies due to macroeconomic factors. Overall, I am very impressed by these numbers.

The following numbers represent the book value + dividend. In my previous format, this was known as the equity growth rate. It was the most significant of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. These numbers are somewhat puzzling because the equity has been decreasing since 2017. There is an explanation for this, which is that Apple has used low-cost debt to fund buybacks. Apple has a strong balance sheet, but they had an opportunity to issue bonds at a low rate to enhance shareholder returns. It is reasonable, and because of that, I'm not concerned about the decrease in equity. Equity increased in fiscal year 2023 as debt became more costly.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offers a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Free cash flow has doubled in the past decade, which is very impressive. Free cash flow decreased slightly in fiscal year 2023, which is understandable given the challenging macroeconomic conditions that most companies faced during the year. Apple still managed to deliver the second-highest free cash flow ever in fiscal 2023, which is impressive. The levered free cash flow margin has remained consistently high over the past ten years. However, fiscal 2023 marked the year with the lowest free cash flow yield. It indicates that the stocks are expensive, but we will revisit this later in the analysis.

Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a period of 3 years. This is achieved by dividing the total long-term debt by earnings. When calculating Apple's debt, I found that Apple has a debt-to-earnings ratio of 0,98 years. It is less than the required 3 years, which means that debt is not a concern if you invest in Apple.

Apple is a great company, but no investment comes without risks, and the same applies to Apple. One short-term risk is macroeconomic factors. In its annual report, Apple mentions that adverse macroeconomic conditions, such as slow growth or recession, high unemployment, inflation, tighter credit, higher interest rates, and currency fluctuations, can negatively impact consumer confidence and spending, and significantly affect demand for the company's products and services. Furthermore, consumer confidence and spending can be significantly negatively impacted by changes in fiscal and monetary policy, financial market volatility, decreases in income or asset values, and other economic factors. Thus, if there are prolonged economic headwinds, it may affect Apple, as consumers may be less inclined to purchase Apple products, which are typically sold at a higher price point.

The supply chain is also a risk. In its annual report, Apple mentions that a significant portion of its manufacturing is carried out by a small number of outsourcing partners. We have previously observed the impact of protests at Foxconn's manufacturing facilities on Apple, leading to a shortfall in iPhone deliveries. As a result, Apple had to lower its guidance. Protests or other events may occur at other manufacturing facilities in the future. Concentrating manufacturing in few locations could once again harm Apple in the future. Antitrust regulations. A company as large as Apple will always be a potential target for antitrust regulators. The U.S. Justice Department has been investigating Apple since 2019 over allegations of abusing its market power to suppress smaller tech companies, including app developers and competing hardware manufacturers. Furthermore, Lina Khan has been appointed as the Chairperson of the Federal Trade Commission, and she is well-known for being a strong opponent of big tech. Finally, we have observed numerous regulations in China. And while these do not directly affect Apple, the President of Tencent. Martin Lau has stated that he believes we will see internet regulations in other markets, such as the United States.

There is also a lot of potential for Apple in the future. Expanding the Services segment. Expanding their Services segment could enhance profitability in the future, as it is a higher-margin business compared to their Products segment. The gross profit margin of the Services segment is 70,9%, which is significantly higher than the gross profit margin in their Products segment, which is 36,6%. Apple's Services segment is growing year over year, increasing from 19% of net sales in 2021 to 20% in 2022, and further to 22% in 2023. Apple has stated that they anticipate growth across all product categories and geographic segments, with expectations for continued expansion. Apple aims to achieve cash neutrality. We observed that Apple generates a significant amount of free cash flow every year. Apple aims to achieve cash neutrality, which involves exploring ways to increase shareholder returns. It could be through acquisitions or by returning value to shareholders. During an earnings call, CEO Tim Cook mentioned that the company averages one acquisition per month, while CFO Luca Maestri stated that they have conducted buybacks totaling more than $550 billion. As Apple aims to achieve cash neutrality, we can anticipate that management will enhance shareholder value through acquisitions, buybacks, and dividends. Emerging markets. Apple has expressed their excitement about the momentum they have in these markets and the opportunities ahead. China and India are particularly interesting markets. Tim Cook has mentioned that he views China as an incredibly important market over the long term, and he is very optimistic about it. He mentioned that India is an incredibly exciting market for Apple and a major focus for the company. He mentioned that they have a small market share in the large Indian market, indicating that there is significant potential for growth. Tim Cook also stated that India is an extraordinary market due to the increasing number of people entering the middle class and the improving distribution network.

Now it is time to calculate the share price of Apple. I perform three different calculations that I learned at a Phil Town seminar. The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 6,13, which is from the fiscal year 2023. I have chosen a projected future EPS growth rate of 11% (Apple achieved double-digit EPS growth last quarter). Additionally, I have selected a projected future price-to-earnings (P/E) ratio of 22, which is twice the growth rate. This decision is based on Apple's historically higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $94,65. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Apple at a price of $47,33 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 113.072, and capital expenditures were 12.085. I attempted to analyze their annual report in order to calculate the proportion of capital expenditures designated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 8.460 in our calculations. The tax provision was 16.741. We have 15.550,061 outstanding shares. Hence, the calculation will be as follows: (113.072 – 8.460 + 16.741) / 15.550,061 x 10 = $78,04 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Apple's free cash flow per share at $6,37 and a growth rate of 11%, if you want to recoup your investment in 8 years, the Payback Time price is $83,85.

Apple is a great company with excellent management. It is arguably the company with the highest moat in the world, which is likely why Warren Buffett has made it his largest investment. There are some short-term macroeconomic risks associated with investing in Apple, but these are not expected to persist indefinitely. Apple has stated that they want to diversify their manufacturing. However, until they have done so, it will still pose a risk, albeit a short-term one. However, antitrust regulations could potentially have a long-term impact on Apple, depending on their outcome. Hence, it is something that needs to be monitored if you invest in Apple. I really like that Apple's high-margin Services segment is growing every year and contributing to a larger share of Apple's net sales annually. Apple has a great ecosystem, as they benefit first from selling the product and then from the services they provide. Emerging markets present a great opportunity to increase product sales, which will in turn boost the Services segment as more people join the ecosystem. I also appreciate that Apple has made it very clear that they will reward shareholders by achieving cash neutrality. I doubt that Apple shares will ever trade at a 50% discount to its intrinsic value, so you will have to decide how much of a discount to the intrinsic value you would like, if any. Personally, I would prefer to have a minimum of a 20% discount applied to the intrinsic value of the Payback Time price. This means that I would like to open a position at approximately $134.

I also write exclusive posts on Medium. If you want to read my posts, you can join Medium by clicking here. It costs $5 a month, but it will allow you to access all my posts as well as everything else on Medium, which is highly recommendable.

My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how I do it, you can read this post.

I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.

Some of the greatest investors in the world believe in karma, and in order to receive, you will have to give. If you appreciated my analysis and want to get some good karma, I would kindly ask you to donate a bit to ADEPAC. It is a charity I know firsthand and I know they do a great job and have very little money. If you have a few Euros to spare, please donate here by clicking on the PayPal icon. Even one or two Euros will make a difference. Thank you.

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